Mobile Banking: an Indian case study

In Bangalore’s Avalahalli neighborhood, a bank account and microloans have transformed the life of 32-year-old Sabira Khanam. Her first loan, of 10,000 rupees (about $200), allowed her to experiment with a small-scale kerosene distributorship. A second, smaller infusion financed her sister’s wedding. A third, of 20,000 rupees, launched a business sewing sequined saris for sale to local women. Khanam, who lives alone and has disabilities stemming from childhood polio, is now able to rent a large masonry house. And she got the cash to do this without resorting to local loan sharks, who charge 2 to 10 percent monthly interest for long-term loans–and much more for small, short-term loans.

But more than half of India’s 1.1 billion people lack access to the kinds of financial services that made such a difference for Khanam. “In most of the developing world–and that means most of the world–the people that are ‘unbanked,’ or very badly banked, represent 70 percent of the population,” says Michael Chu, a Harvard Business School lecturer and an expert on microfinance, which extends basic banking services to poor people who have not been served by the traditional financial system. “Literally, you are talking about 4 billion of the 6.5 billion people in the world. We are just beginning to penetrate that.” And despite the well-­understood potential of microlending to help lift people out of poverty, it currently reaches fewer than 200 million people worldwide. ­(A 2007 estimate put the figure as low as 133 million.) Micro­finance “has been progressing at a very fast rate,” Chu says. “But if you look at it in terms of how many people [enjoy the benefits], we are just beginning.”

A peek at the administrative tasks associated with Khanam’s loans helps explain why. A representative from Grameen Koota, the microfinance institution that lent to Khanam, must attend weekly meetings at her house to accept repayments. (Khanam leads a group that includes nine other borrowers, all of them women, who have financed everything from down payments on motorized rickshaws to materials for incense manufacture.) To service its 160,000 borrowers, Grameen Koota maintains a staff of 600, most of them loan officers from 52 branches who must attend 5,000 such meetings each week. Beyond the heavy workload, the risk of robbery, embezzlement, or fraud plagues the process. “Today, every one of my loan officers is carrying about 50,000 to 100,000 rupees to these meetings,” says Suresh Krishna, Grameen Koota’s managing director. “He is going 20 kilometers, collecting repayments, and bringing it back. We are carrying so much cash. We are prone to thefts, frauds, robberies, and misuses of this money. In one incident, one of my fellows was robbed; five people stopped him, showed knives, and snatched away 33,000 rupees.”

While visiting Khanam’s house and listening to her story over a glass of orange soda (and over the tinny strains of the prayer calls from the nearby mosque), I noticed that she owned a cell phone. It was a simple Nokia 1100, the low-end stalwart of developing-world communications; she purchased it last year after concluding that the business value justified the investment of 3,000 rupees (roughly the retail cost of six of her saris). Her prepaid plan allows outgoing calls for about half a rupee (less than two cents) per minute. One of her communication strate­gies is to note the phone number of an incoming call but not answer the phone. It’s a common trick throughout the developing world; in this manner, people can convey mutually understood messages, such as “Let’s meet.”

Soon, the phone could transform how she deals with Grameen Koota. In one of a handful of such initiatives in India, a Bangalore startup called mChek is plunging into microfinance. Its software is already used by 500,000 people, who can use their mobile phones to pay their phone bills and purchase a limited number of goods and services, such as airline and movie tickets. Through a pilot project, as many as 5,000 borrowers will begin using the system to manage their finances–tapping keys on their cell phones to access bank accounts and execute transfers, make payments to Grameen Koota, and possibly even do business with local merchants. Several borrowers should be able to share one phone. The new system could help Grameen Koota achieve its goal of roughly quadrupling its lending efforts by 2010. “All this will get eliminated,” Krishna exclaims, pointing to photos of his loan officers poring over stacks of rupees. “All our transactions will be captured digitally. The back-office functions will become automated. It will become so much more efficient and save a lot of time. So we can add on more borrowers.”

If this and similar efforts succeed, the concept could be extended to millions–even hundreds of millions–of Indians, giving them access to banking and credit for the first time. And India’s national economy would stand to gain as well. Money that is electronically lodged in accounts earns interest for banks and account holders. Money sitting in wallets, or under mattresses, does not–and right now, 95 percent of financial transactions in India are conducted in cash. “You are talking about tens of billions of dollars in organized commerce on an annual basis,” says Mohanjit Jolly, the executive director of the Indian office of the venture capital firm Draper Fisher Jurvetson, which has invested in mChek. “Treasury coffers will have a lot more money, and villagers will start earning interest on this money. Overall, the cost of capital will get reduced, liquidity will get increased, and you will see phenomenal changes in terms of what the villagers will be able to do. The bottom line: it’s education, it’s connectivity, it’s improved quality of life … [and] this mobile connectivity, this mobile transaction, is one of the key ingredients.”

Mobile Leapfrog
More than 450 million Indians live below the poverty line–that is, on less than 25 rupees per day. Increasingly, though, these people are buying cell phones. By the end of August 2008, 305 million Indians had cell phones; the total grew by more than 9 million in August alone, making India the fastest-growing mobile market in the world and the second-largest after China. At this rate, observers say, India could have nearly 750 million cell-phone owners by the end of 2012. And most new subscribers are poor rural dwellers taking advantage of plunging costs for no-frills prepaid plans (see “Phone Banking”). In signing up for cellular service, many of them are leapfrogging elements of the traditional infrastructure to which they have little or no access: landline phones, the Internet, the power grid.

All these new cell phones could deliver the benefits of no-frills banking and credit to the rural poor–something India’s central bank, the Reserve Bank of India (RBI), has been pushing banks to do, since it could improve people’s lives in myriad small ways. “A lot of poverty comes from having not even the tiniest amount of financial slack,” says Antoinette Schoar, an associate professor of entrepreneurial finance at MIT’s Sloan School of Management. “People who have no access to credit at all–like really small farmers–pay sometimes up to 10 percent per day. They literally take 100 rupees’ worth of goods from a vendor and have to give back 110 rupees in the evening. If they have even a tiny shock one day–a tiny accident–and can’t pay back the vendor, it is devastating.” Credit can smooth out farmers’ financial boom-and-bust cycles, she says, allowing more consistent access to food, medical care, and other necessities.

Until now, mChek’s payment software has had fairly limited applications; its 500,000 registered users employ it mainly to top up prepaid accounts with Airtel, India’s dominant mobile-phone company. (Most users are in India, but some are in Sri Lanka, the only other country where mChek now operates.) But in theory, the technology could be used for any financial transaction; entering a PIN and making a few clicks on the keypad shifts money from one place to another.

When I met with mChek CEO Sanjay Swamy in his third-floor office suite, overlooking a thoroughfare crawling with cars, motorcycles, and yellow motorized rickshaws, he was enthusiastic about the prospect that mChek could bring mobile banking to the masses. When Indians sign up for their first cell phones–a process that involves identity verification in a country that has no counterpart to the U.S. Social Security number–they could open a bank account simultaneously. Considering that Indians are signing up for 16 million new accounts monthly (the net increase is smaller because some accounts expire), “that’s a half-million accounts per day, or about six accounts per second,” Swamy told me. “By the time I finish this sentence, we lose the opportunity to bank a hundred people! That’s how stunning the opportunity is. If they are sophisticated enough to learn how to use a cell phone, chances are they are sophisticated enough to use it for other applications.” India’s regulations, unlike those of some other countries, do not allow telecom companies to enroll people in bank accounts; only banks and nongovernmental organizations, including microfinance institutions like Grameen Koota, can do that. So for now, mChek hopes to form partnerships with such organizations.

To get some sense of the potential benefits for the Indian economy, consider just one type of transfer: the payment of phone bills themselves. Today, most Indian cell-phone users pay for service in advance, in cash; the average monthly expenditure is about 250 rupees. If only 10 percent of India’s 305 million mobile-phone subscribers opened bank accounts and started paying just these bills electronically, more than 7,600 rupees, or $160 million, would exit the cash economy and enter the banking system every month.

And to grasp how ordinary people could benefit, consider the life of the average farmer in the Bangalore area. Typically, a farmer spends hours trekking into the city for a 4:00 a.m. auction to sell his goods. The auction concludes by 6:00 a.m., after which the farmer takes an IOU to a bank, waits for it to open, and collects his money. Then he returns home, risking theft on the way. “We looked at the model and said, What if the retailer could use mChek to pay farmers electronically, and the farmer would receive notification on his cell phone?” Swamy says. The company conducted a pilot project with Citibank and a Bangalore retailer that buys fresh produce; they learned that 85 percent of the farmers attending the auction already owned cell phones. And some reported that if they could accept payment electronically, not only would they save hours queuing at banks, but they might skip the journey altogether, sending a son or a hired laborer in their place.

Dancing with Gorillas
Of course, mChek is not the first company with visions of using cell phones to bring banking to the world’s poor. Ignacio Mas of the Consultative Group to Assist the Poor (CGAP), a microfinance think tank funded by 34 development organizations and housed at the World Bank, traces the trend to 2001 in the Philippines, where a telecom company, Smart Communications, partnered with banks to provide financial services. The concept spread; by 2005 the South African startup Wizzit had launched a banking and payment platform for mobile phones. And in 2007 Kenya’s leading telecom, Safaricom, launched the money transfer service M-Pesa.

Yet these efforts to graft developed-world banking onto ­developing-world mobile networks are not commensurate with the swelling popularity of the mobile phone itself. The larger story is one of pilot projects that petered out amid difficulties including cumbersome national regulations, unfriendly user interfaces, and an inability to make the right partnerships. “The reality of the field today is that the promise–which a lot of people understand is huge–is more in the conceptual stage,” says Michael Chu. “The banking industry is very suspicious of the cell-phone industry, because they suspect that cell phones will make them obsolete. The cell-phone companies think the banks are like dinosaurs.” But these players have to work together seamlessly for cell-phone-based banking to work.

Both mChek’s technology and its business model are geared to avoiding such pitfalls, some observers say. The company got its start in 2006, when Draper Fisher Jurvetson spun it out from A Little World–a Mumbai company developing smart cards that the Indian government sought to use as national ID cards–and gave it $4 million in funding. From the beginning, mChek has emphasized security and usability. The software itself runs on any phone (even the years-old used phones sold at many storefronts), and the transactions use simple text messages that work on any network. Moreover, with two forms of encryption plus the usual PIN protection, the system is considered as secure as any card-swiping device in any retail outlet: mChek says it is the only mobile payment platform to have won certification from Visa. And the company isn’t locked into an exclusive partnership with any one bank or mobile carrier, so it’s flexible and able to grow. “What’s great about what they are doing is that they are working with all of the [mobile carriers] and banks,” says Crystal Hutter, a manager of investments at Omidyar Network, the philanthropic investment firm established by eBay founder Pierre Omidyar, which is active in microfinance. “They are not locking themselves into one operator or one bank. Having the ability to work interoperably is huge.”

Serious growth became more likely in August, when Airtel decided to incorporate the mChek platform directly into the SIM card–the device inside a mobile phone that identifies the user and phone number–on all four million phones it ships monthly to new customers. This means phone owners won’t have to seek out and download mChek’s software. Airtel is marketing the feature ­heavily as a way to pay phone bills, in part because it pays mChek less for each transaction than it pays the 800,000 retailers who now accept cash payments (mostly prepaid top-ups) on its behalf. For mChek, then, the task now is to forge more such partnerships and navigate a shifting regulatory environment. Draper Fisher Jurvetson’s Jolly says that mChek’s achievements thus far are unique in India. “I often talk about [mChek] as a company that is dancing with gorillas or behemoths,” says Jolly. “You have the banking sector on one side and the [telecom companies] on the other side, and then you’ve got the MasterCard and Visa folks, and finally the regulatory oversight bodies like the RBI. Trying to corral all of them, for a startup, is next to impossible. What mChek has been able to accomplish in India has never been done before.”

The company does face some emerging local competition. In Bangalore, JiGrahak Mobility Solutions has developed a popular bill-paying and banking platform, but it’s sticking to the upper end of the market; its service requires the Internet connections available on higher-end phones. In Delhi, Eko India Financial Services is partnering with a local bank to bring no-frills bank accounts to the rural poor in a pilot project limited to 5,000 people. And Obopay India–the Indian branch of a U.S. firm–is working on developing a mobile microfinance platform in partnership with Grameen Solutions, one of the organizations created by the Bangladeshi microfinancier Muhammad Yunus, winner of the 2006 Nobel Peace Prize. (It is not connected with Grameen Koota in Bangalore: grameen means “rural” or “of the village.”) Obopay’s initiative, called “Bank a Billion,” was scheduled for a rollout in Mumbai and Bangladesh by early November, says Vijay ­Balakrishnan, chief marketing officer for Obopay India, which hopes to enroll a million people in those two regions within 18 months. In Obopay’s scheme, the purchase price of a cell phone would be built into a Grameen microloan; bill-paying software would be incorporated into the SIM card; and the borrower would open a no-frills bank account.

Cash and Cows
The difficulty with such efforts is that it’s not clear how hundreds of millions of poor rural people doing mobile banking would actually deposit and withdraw cash, even if they used their phones for transfers. No nation has yet convinced its citizens to forsake cash-stuffed wallets and convenient ATMs. Sabira Khanam, for example, sells her saris for cash. And she makes cash deposits in a conventional bank account (though from there, she will be able to receive and repay microloans electronically under the Grameen Koota/mChek project). “Today, cell-phone companies by themselves cannot provide the things that banks provide,” says Harvard’s Chu. “At the end of the day, if this is to be an effective platform, you have to have physical delivery or access to the funds.”

In India, some existing programs could help bridge the gap. Prodded by government mandates, state-owned banks such as Punjab National Bank, State Bank of India, and Corporation Bank have established outreach programs in recent years. An array of branchless-banking efforts–stand-alone kiosks, portable terminals manned by village representatives, and banking services delivered through a Kinko’s-like retail franchise run by a firm called Comat–have appeared in some of India’s 638,000 villages.

One such effort has taken hold in Kasaghatta, a village about 70 kilometers north of Bangalore. Reached by a few kilometers of bumpy dirt road, Kasaghatta does not appear on national maps. Extended families share concrete or thatched houses; women in brightly colored saris scrub pots and lead cows down red-earth alleys; men haul steel buckets of fresh milk to waiting delivery trucks; roosters skitter about. The rocky hills that characterize southern India’s Deccan Plateau dot the horizon.

If you need anything in Kasaghatta, the person to see is ­Muniyamma Ramanjanappa. A calm and kindly grandmother in her 40s, she manages the village school and serves as its teacher for the primary grades. She’s also the government’s point of contact on health programs for women and children. Government-issued supplies and medicines, as well as financial assistance to local mothers, are routed through her. She frequently travels seven kilometers by bus to the nearest branch of the state-run Corporation Bank, which disburses government benefits. Through her relationship with the tellers, she has become the bank’s “correspondent” to Kasaghatta. The bank issued her a machine–manu­factured by the Bangalore startup Integra ­Microsystems–that in 2007 brought banking to the village for the first time. Villagers who visit Muniyamma can now use smart cards and thumbprint authentication to deposit and withdraw cash. Muniyamma keeps the cash in a strongbox, reconciles accounts via a wireless connection to the bank (established over her cell phone), and gives out printed receipts for each transaction.

On the day I visited, Muniyamma padded barefoot around her tidy one-room concrete home, where immaculate steel cookware was stacked in the kitchen area. A silver wedding ring encircled the second toe of her left foot; studs adorned both ears and her right nostril; a mint-green sari swathed most of the rest of her. Before long, Jayalakshmamma Doddarasaiah, a 22-year-old mother of two, arrived carrying her 17-month-old son, Mahesha. ­Jayalakshmamma wanted to deposit 100 rupees from a recent sale of ragi, a local crop similar to millet. She was in a hurry, as it was almost time to milk the cows in her extended family’s concrete-­and-thatch compound two alleys over. Jayalakshmamma slid her smart card into a plastic slot on the side of Muniyamma’s white metal machine and, after some prompting from the audio interface, placed her left thumb on the reader. The ragi harvest had left her fingers cut and callused, so the machine was unable to recognize her. But other villagers who stopped by had no problems, and the technology is clearly widening their opportunities. For example, a 55-year-old village man named ­Karehanumaiah was able to deposit 150 rupees. Until early 2008, he’d never had a bank account or access to formal credit. Borrowing 1,800 rupees from an informal lender to buy a goat would have cost him as much as 10 percent monthly interest. Now he has a savings account and can borrow from his bank.

Such approaches have their critics; Swamy is one. He says that India could, in fact, become utterly cashless; a man like ­Karehanumaiah could be paid for his farm labor electronically and buy goods and services the same way. Given that many areas of India have no banking infrastructure at all, he argues, it makes no sense to try to build kiosks and machines. “Those are nonscalable models and very labor-intensive models,” Swamy says. “If he can do it in his village, he can do it in his pocket [with his cell phone]. That is our perspective.” Still, most experts say a wholesale changeover to electronic transactions is unrealistic, and that mobile banking will require some connection to the cash economy.

Either way, the technology is there; the issue now is creating the environment necessary to cultivate it. “First, it will take changes in regulation,” says CGAP’s Ignacio Mas. “Second, it will take a mind shift by the banks to see opportunities where they haven’t before. And it will take partnerships: how will the [telecom companies] and banks come together with companies like mChek and other vendors who can bring together the [retail] agents?”

Nobody has specifically proposed using cell phones for banking in Kasaghatta. But it is plain to see that in the village, all the elements are in place. Not long after watching ­Jayalakshmamma’s failed effort to deposit 100 rupees, I visited her home. The scene was one of bare-bones rural living; her parents sat on a floor of packed dirt, holding her daughter. Two cows munched grass nearby. Reaching the interior of the one-room concrete hut required passing through a thatched enclosure housing more cows. But it turned out that Jayalakshmamma’s husband, like Sabira Khanam, owns a cell phone. I asked Muniyamma how many people had bank accounts in the village, and the answer came back: 190 of the 700 residents. Then I asked how many owned cell phones. The number was 300, and counting.